When India’s Central Bank, the Reserve Bank of India increased repo rates in May this year, many were convinced that this would lead to a reversal in the demand for home loans. To the relief of lenders, this never happened.
On the contrary, demand for home loans continues to be strong and is expected to gain momentum over the next few months. The RBI has increased repo rates three times this year to control inflation, with expectations of another round of increase by the end of this financial year.
Rate hikes are in line with the hawkish monetary stance of Central Banks all over the world to check spiralling inflation. Many Indian banks have passed on rate hikes to buyers, increasing the cost of home loans but this isn’t deterring borrowers.
The reasons for this are many. India’s economy is doing well, homes are still affordable and buyer sentiment is positive, especially ahead of the festive season. Add to this a high level of pent-up demand for homes and home loans are expected to sustain their growth momentum. When interest rates were historically low during the Covid lockdown period, buyers could not afford to buy homes because of salary cuts and a general negative sentiment.
But, with salaries back to pre-Covid levels, many buyers are looking to buy homes. Accumulated pent-updemand over the last two years is now getting converted into home sales, spelling good news for home loan lenders. In fact, the forthcoming festival season could be the key to sustaining demand for home loans. Every festive season, real estate developers offer freebies and other incentives to attract home buyers. This season is no different. Real estate developers are offering discounts on property prices and other innovative payment schemes to boost demand.
The demand for homes is particularly strong in big metro cities, in the mid-income and luxury segments. This is true of both under construction and ready-to-move-in properties, although buyers have shown a clear preference for the latter. Ready-to-move-in homes appeal to home buyers looking to upgrade their homes quickly. They offer buyers a sense of security that they will get the house they have paid for.
In fact, ready-to-move-in properties are in large part responsible for the revival in home sales and indirectly home loans. This is true of tier two and three cities as well, where demand for homes is soaring. Mid-end and affordable segment of homes in the price range of Rs 45 lakh to Rs 1 crore are high in demand. In the pre-pandemic times, the young middle class preferred to rent rather than own a home. In the post-Covid world, everyone is looking for stability, forcing people to reconsider their decision to buy property.
Banks and home finance companies have consistently reported an uptick in demand for home loans, in tier two and three cities. A good monsoon season has helped raise the per-capita income of buyers, which is fuelling demand for homes. Various estimates show that demand for affordable homes has increased in tier 2 and tier 3 cities, thanks to government schemes such as AMRUT, PMAY(U) and Smart Cities Mission.
To meet the increased demand, developers are launching many affordable housing projects in semi-urban and urban areas.In fact, the demand for home loans from India’s tier 2 and tier 3 cities have grown faster than that of Mumbai and the National Capital Region. SBI Research estimates that India’s home loan market is likely to double in five years. The government’s SVAMITVA scheme, which offers buyers the right to document their residential properties, is increasing demand for home loans. In Haryana and Uttar Pradesh, home loan disbursal has increased thanks to this scheme.
Many believe that home loan rates in India are still low, and the recent increase in repo rates may not have much of an impact on demand for home loans. While some banks have begun to raise interest rates, they are still offering attractive rates of interest to selective home loan borrowers who have high credit rating. The expectation is that home loan disbursal in the year 2022, will surpass pre-Covid levels. First-time home buyers, mostly comprising of millennial are driving home loan growth. As millennial settle down and build families, they are looking for a sense of permanence such as owning a home.
There is also a growing desire among home buyers for large spacious homes to accommodate the growing trend of work from home or hybrid model of working. In the last few months, there has been a surge in demand for large homes, with dedicated office space, extra rooms, balconies, gyms and modern gadgets and appliances. This trend is expected to continue for the rest of the year.
There are some, who worry that the rate hikes could not have come at a worse time, considering the inflation in global commodity prices of building materials such as cement and steel. The fear is that this will bump up home prices. In some cases, real estate developers have passed on input cost increase to buyers, but this has not lowered the appetite for homes.
Buyers see homes as a good investment and a hedge against inflation. This might even be a good time for buyers to invest in property before home prices escalate. Real estate developers believe that the incentives on offer this festive season will push up home sales. The popular consensus is that even if there is another round of interest rate hike, it will not substantially dent demand for home loans, considering the strong desire among prospective buyers to own a home.